Leveraging green investment

Eleven years after their first issue, green bonds are now becoming coveted financial instruments.

Alarming signs of accelerating climate change have increasingly highlighted the fact that the funds provided by supranationals and public entities won’t be enough to finance sustainability and carbon emission mitigating projects necessary to cap rising temperatures at 1.5°C above pre-industrial levels.

Green bonds pioneered by the European Investment Bank (EIB) 11 years ago were already designed to draw in money for projects with environmental or climate benefits, but initially, they didn’t stoke too much interest among investors as they were mostly AAA-rated financial instruments with low yields.

However, there have been a number of events contributing to green debt’s soaring popularity over the last five years. Of note was a memorable speech given by Mark Carney, the governor of the Bank of England, to Lloyd’s of London in 2015, where he flagged up how climate change could lead to financial instability and falling living standards if the world’s leading countries did not do more to ensure companies come clean about their carbon emissions.

A decisive factor to have helped win over a large number of global investors was the publishing of the Green Bond Principles (GBP), which promoted disclosure, transparency and reporting on the proceeds of green bond issuings. The publication enabled investors to make more informed investment decisions by providing them with insight into the expected environmental impact of the projects they were considering including in their green portfolio.

The EIB demonstrated its long-term commitment to the green bond market by immediate alignment with the GBP. Aldo Romani, Head of Sustainability Funding at EIB and one of the inventors of green bonds, maintains that reducing the complexity of green investment and establishing a common language between stakeholders through reporting principles, common definitions and metrics as, well as introducing external scrutiny into the process, have been key to gaining investors’ trust.

Although they represent only a small fraction of the totality of financial instruments, green bonds have already come a long way. In Q3 of 2018 there were 293 green bond issues, with 212 from the USA, 18 from China and 13 from Sweden. Although the 46 new issuers from 18 countries that entered the market in the quarter brought the total number to 553, the current demand for green bonds seems to outstrip supply.

Not only have the number of issuers increased considerably, but they have also become more diverse: many come now from developing countries, and a larger proportion of them offer high yields. As Kris Atkinson, Portfolio Manager of Fidelity International, explains, with green bonds – just like with any other investment – risk and return will remain the main investment criteria, and investors always need to make sure that the credit of the green bond issuer whose climate change project matches their theme is sound.

In September this year, building on the success of green financial instruments, the EIB issued its first Sustainability Awareness Bond. The bond expands the benefits of impact reporting and transparency beyond climate change into water management and other sustainability projects – thus diversifying green investment opportunities one step further. This initiative supports the regulatory developments taking place at European level to achieve a more sustainable financial system. EIB is assisting the European Commission in this endeavour by providing technical expertise on the development of a taxonomy for green activities and a green bond standard.